Formulas and Sample Calculations

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Real Estate Investment Analysis Formulas

Income and Expense Statement Income
Potential Gross Income (PG1) Less: Vacancy and Bad Debt Allowance Equals: Effective Gross Income (EGI) Operating Expenses Exclude: Depreciation Mortgage Payments Non-Operating Expenses. E.G Directors Salaries Capital Expenditures Net Operating Income (NO1) Less: Debt Service (P + I) Cash Flow Before Tax (CFBT) Less: Income Taxes Equals Cash Flow After Tax (CFAT) $__________ __________ $__________
$__________ __________ __________ __________ __________ $__________
Financial Measures:
Potential Gross Income Multiplier (PGIM)
Also called Potential Gross Rent Multiplier (PGRM) PGIM = Market Value Potential Gross Income MV = EGI x EGIM MV PGI or Market Value = Potential Gross Income x PGIM
Effective gross Income Multiplier (EGIM)

Also called Effective Gross Rent Multiplier (EGRM) EGIM= Market Value Effective Gross Income MV PGI or Market Value = Effective Gross Income x EGIM MV = EGI x EGIM =
Net Income Multiplier (NIM)

NIM= Multiplier Market Value Net Operating Income MV = NOI x NIM = MV NOI or Market Value = Net Operating Income x Net Income
Capitalization Rate (Cap Rate)

Also called Brokers Yield Cap Rate(%) = Net Operating Income x 100 Market Value = NOI x 100 MV or Market Value = Operating Income x 100 Cap Rate (%) MV = NOI x 100 Cap Rate (%)
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Copyright Neil Osborne 2014. All rights reserved
Investit Software Inc. Real Estate Investment, Buy vs. Lease, Lease & Development Analysis Software www.investitpro.com 1-877-878-1828 Email: investit@investitsoftware.com
Return on Equity (ROE)

Also called: Cash on Cash Return ROE(%) = (Net Operating Income Debt Service) x 100 Equity Where: Debt Service = Principal & Interest Payment ROE (%) ROE (%) = Equity ROE (%) = (MVMtge.) Equity = Market Value Mortgage MV = (NOI-DS) x 100 + Mortgage Equity Dividend Rat e(EDR)
or
Cash Flow Before Tax x 100
(NOIDS) x 100
Default Ratio (Break-even) (%)

Using Potential Gross Income = (Operating Expenses + Debt Service) x 100 Potential Gross Income Using Effective Gross Income = (Operating Expenses + Debt Service) x 100 Effective Gross Income
Financing Measures.
Debt Service Ratio (DSR)
= Net Operating Income Debt Service
Loan to Value Ratio (%)

= Loan Amount x 100 Market Value
Rental Apartment Building Measures.

1. Price Per Suite 2. Price Per Sq. Foot (Using Suite Areas) 3. Rents Per Sq. Foot per month 4. Operating Costs a. Operating Costs Per Suite Per Year b. Operating Cost per Sq. Foot per Year 5. Operating Expense Ratio (OER) = Operating Expense x 100 Effective Gross Income
Home Financing:
Gross Debt Service Ratio = (Principal + Interest + Taxes) Gross Family Income
Lenders often modify the basic Gross Debt Service Ratio Formula. Modified Gross Debt Service Ratio = (Principal + Interest + Taxes + Heat + % of Maintenance Gross Family Income
Total Gross Debt Service Ratio
= (Principal + Interest + Taxes + Other Debt Payments) Gross Family Income
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Commercial Real Estate Sample Calculations

The following examples illustrate how to use the real estate formulas. In Example No.1 the information is obtained for the property and the financial measures calculated. In Example No. 2 the financial measures such as the Cap Rate are obtained for comparable sales and are used to calculate the Market Value for the subject property. Example No 1. Sale Price (Market Value) $3,165,000 Potential Gross Income: $306,000 Vacancy & Bad Debt Allowance: 4.5% Operating Expenses $58,000 Mortgage $2,056,000 Mortgage Payment (P+i) $180,538 Number of Suites 30 Total Rentable Area 24,000 Square feet Note: All figures are annual Calculate: Potential Gross Income Multiplier (PGIM) Effective Gross Income Multiplier (EGIM) Net Income Multiplier (NIM) Capitalization Rate (Cap Rate) Return on Equity (ROE) Default Ratio (Break even) based on: Potential Gross Income Effective Gross Income Debt Service Ratio (DSR) Loan to Value Ratio Price per Suite Price per Square Foot Rent per Square Foot per Month Operating Cost per Suite per Year Operating Cost per Square Foot per Year Operating Expense Ratio (OER) based on: Potential Gross Income Effective Gross Income
1. Construct an Annual Income and Expense Statement Potential Gross Income Less Vacancy & Bad Debt Allowance (4.5%) Effective Gross Income Operating Expenses Net Operating Income Less; Debt Service (P+i) Cash Flow Before Tax 3
$306,000 13,770 $292,230 58,000 $234,230 180,538 $ 53,692
2. Calculate the Financial Measures Potential Gross Income Multiplier (PGIM): PGIM = MV = 3,165,000 PGI 10.34
306,000
Effective Gross Income Multiplier (EGIM): EGIM = MV = 3,165,000 EGI 10.83
292,230
Net Income Multiplier (NIM): NIM = MV = 3,165,000 NOI 13.51
234,230
Capitalization Rate (Cap Rate): Cap Rate = NOI MV = 234,230 x 100 3,165,000 7.40%
Return on Equity (ROE): ROE = (NOI DS) x100 EGI = Cash Flow Before Tax x 100 Equity = 53,692 x 100 (3,165,000 - 2,056,000)
= 4.84% Default Ratio (Breakeven): Based on Potential Gross Income: Default Ratio = (Operating Expenses + Debt Service) x 100 Potential Gross Income = (58,000 + 180,538) x 100 306,000 = 77.95%
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Default Ratio (Breakeven) cont.
Based on Effective Gross Income: Default Ratio = (Operating Expenses + Debt Service) x 100 Effective Gross Income = (58,000 + 180,538) x 100 292,230 = 81.63%
Debt Service Ratio (DSR) = Net Operating Income Debt Service = 234,230 180,538 = 1.30 Loan to Value Ratio % = Loan Amount x 100 Market Value = 2,056,000 x 100 3,165,000 = 64.96% Price Per Suite = 3,165,000 30 = $105,500 Price per Square foot = 3,165,000 24,000 = $131.88
Rent Per Sq. Foot per Mo. = 306,000 24,000 x 12 = $1.06 Operating Costs Per Suite Per Year = 58,000 30 = $1,933
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Operating Cost per Square foot per year = 58,000 24,000 = $2.42 Operating Expense Ratio (OER) Based on Potential Gross Income: = Operating Expenses x 100 Potential Gross Income = 58,000 x 100 306,000 = 18.95% Based on Effective Gross Income: = Operating Expenses x 100 Effective Gross Income = 58,000 x 100 292,230 = 19.85% Summary. Potential Gross Income Multiplier (EGIM): Potential Gross Income Multiplier (EGIM): Net Income Multiplier (NIM): Capitalization Rate (Cap Rate) Return on Equity (ROE) Default Ratio (Break even) based on: Potential Gross Income Effective Gross Income Debt Service Ratio (DSR) Loan to Value Ratio Price per Suite Price per Square Foot Rent per Square foot per month Operating Cost per Suite per Year Operating Cost per Square Foot per Year Operating Expense Ratio (OER) based on: Potential Gross Income Effective Gross Income 10.83 10.83 13.51 7.40% 4.84% 77.95% 81.63% 1.30 64.96% $105,000 $131.88 $1.06 $1,933 $2.42 18.96% 19.85%
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Example No 2. Potential Gross Income: Vacancy & Bad Debt Allowance: Operating Expenses Mortgage Mortgage Payment (P+i) Number of Suites Total Rentable Area Note: All figures are annual Calculate the Market Value using the following financial measures Effective Gross Income Multiplier (EGIM): 9.30 Net Income Multiplier (NIM): 12.50 Capitalization Rate (Cap Rate): 8.00% Return on Equity (ROE): 5.57% 1. Start by constructing the Annual Income and Expense Statement Potential Gross Income Less Vacancy & Bad Debt Allowance (5.0%) Effective Gross Income Operating Expenses Net Operating Income Less; Debt Service (P+i) Cash Flow Before Tax $244,800 12,240 $232,560 49,300 $183,260 147,500 $ 35,760 $244,800 5.0% $49,300 $1,685,000 $147,500 24 18,720 Square feet
2. Calculate the Market Value based on the: Effective Gross Income Multiplier (EGIM): MV = Effective Gross Income x EGIM = 232,560 x 9.30 = $2,162,808
Net Income Multiplier (NIM): MV = Net Operating x NIM = 183,260 x 12.50 = $2,290,750
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Capitalization Rate (Cap Rate): MV = Net Operating Income x 100 Cap Rate = 183,260 x 100 8.0 = $2,290,750 Return on Equity (ROE): MV = (NOI - DS) x 100 + Mortgage ROE (183,260 - 147,500) + 1,685,000 5.57 $2,327,011
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Investit Software Inc. Real Estate Investment, Buy vs. Lease, Lease & Development Analysis Software www.investitpro.

com 1-877-878-1828 Email: investit@investitsoftware.com

Real Estate Investment Analysis Formulas

$ $

Effective gross Income Multiplier (EGIM)

Net Income Multiplier (NIM)

Capitalization Rate (Cap Rate)

Return on Equity (ROE)

Cash Flow Before Tax x 100

Default Ratio (Break-even) (%)

Loan to Value Ratio (%)

Rental Apartment Building Measures.

Total Gross Debt Service Ratio

= (Principal + Interest + Taxes + Other Debt Payments) Gross Family Income

Commercial Real Estate Sample Calculations

$306,000 13,770 $292,230 58,000 $234,230 180,538 $ 53,692

Effective Gross Income Multiplier (EGIM): EGIM = MV = 3,165,000 EGI 10.83

Net Income Multiplier (NIM): NIM = MV = 3,165,000 NOI 13.51

Default Ratio (Breakeven) cont.

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